Martin Haggart of Aegon advises a reader with a tax question relating to a Sipp and his children who live abroad.
I have a fairly substantial Sipp that I do not need to access for the foreseeable future, and I therefore plan to use it for inheritance planning purposes. I am 68, and I understand that if I die before the age of 75, the entire Sipp can be given to my nominated beneficiaries free of tax.
I am planning to survive beyond the age of 75, and I believe that withdrawals by my beneficiaries will be taxed at source at each beneficiary’s highest marginal rate of tax. Normally that would be fine, but both of my children (the beneficiaries) are currently living abroad (in New Zealand and France) and are likely to continue to do so – therefore, they pay no UK tax. Would either drawdown or complete withdrawal be taxed in this scenario and, if so, at what rate?
Although I have been an avid subscriber to Money Observer for many years, this year – for the first time – I also bought Your Fund Choices*. Why didn’t I do it earlier? It is a fantastic publication, worth every penny for the clear and structured way it presents Rated Funds. I have found it really helpful in re-planning my portfolios. Congratulations, and keep it up.
John Williams, by email
Martin Haggart of Aegon replies: The situation on death after age 75 is that benefits paid to a ‘qualifying individual’ – as opposed to, say, a trust – will be taxed at the recipient’s marginal rate of tax, irrespective of whether or not benefits are paid as income or lump sum. Note that while the children may be nominated, a nomination is generally not legally binding, and the scheme will exercise its discretion to select beneficiaries based on the information that has been supplied to it.
Many UK providers will not set up a drawdown plan for someone living overseas. If the children are chosen by the scheme, and are not UK resident and not subject to UK tax, they may wish to take action before any benefits are physically taken. The UK has comprehensive double taxation arrangements in place with both New Zealand and France. The beneficiaries may be able to arrange with the UK tax authorities for the lump sums (or income if available) to be paid gross in the UK and taxed only in the country that they are now living in.
In the absence of a UK tax code for the current tax year, any benefits payable would be taxed at the emergency month-one tax rate, so only one twelfth of the personal allowance, basic-rate band and higher-rate band would be available – so far too much tax would be paid up-front and the beneficiaries would need to reclaim tax from HMRC.
The beneficiaries would need to take specialist tax advice in the jurisdictions where they are now living in order to identify the tax implications locally for lump sums received from a UK-registered scheme.
*The 2019 Your Fund Choices supplement will be available in February.
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